Rosneft proposes to tie the calculation of oil taxes to Dubai, not Brent

As it became known to Kommersant, the largest Russian oil company Rosneft is proposing to the government to tie the calculation of oil taxes to Dubai, and not Brent, as it is now. The reason is that the main flows of Russian oil are now redirected to Asia, where Dubai is mainly traded, while the European Brent grade is poorly represented. Rosneft itself has already switched to linking to Dubai for the supply of Urals. The Ministry of Finance is “working through” this idea.

Rosneft suggested that the government use the Dubai grade instead of Brent when calculating the MET and export duty, sources told Kommersant. According to them, in May, the head of the Russian oil company, Igor Sechin, sent a corresponding letter to Prime Minister Mikhail Mishustin. Since April, the Brent quotation (determined by the Argus pricing agency) minus a fixed discount has been one of the methods for calculating oil production tax and export duty on it. This method is used if the price of Urals falls below the Brent quote, taking into account the discount.

The Ministry of Finance confirmed to Kommersant that the proposal of the head of Rosneft was received, adding that it was “being worked out.” The oil company did not answer “Kommersant”.

Last year, due to sanctions and a boycott of Russian oil supplies by European countries, companies had to redirect volumes to Asia. At the beginning of 2023, when the price ceiling for Russian oil introduced by the West came into force, the Urals discount to Brent reached almost $40 per barrel. At the same time, if at the beginning of 2022 the EU accounted for about 80% of Urals maritime exports from Russia, then since the middle of last year the share of such deliveries has decreased to 6%, and the share of deliveries to the Asia-Pacific region has grown from 10% to 87%. At the same time, in December last year, India accounted for more than 77% of Urals volumes.

According to Igor Sechin, the Brent base quote does not reflect the market price of Russian oil. The Dubai variety is the main benchmark used in oil supplies to Asia, in particular, exports of raw materials via the ESPO pipeline are tied to it, while Brent is mainly used in European trading. “If Russian oil does not enter the European market, then there is no reference price for Russian oil that does not enter,” the head of Rosneft said back in February. “Reference prices will be formed where oil volumes actually go,” Mr. Sechin said.

Rosneft is the only Russian oil company that has switched to the Dubai quotation for Urals supplies, according to a Kommersant source. The rest of the oil companies traditionally use the reference to the North Sea standard for supplies that were previously carried out in a western direction, but were redirected to the east. Kommersant’s source in the oil industry calls it a logical transition to Dubai, given that Asia is now the main direction for supplies, and the Dubai variety is the key to pricing in this region. According to Kommersant’s interlocutor, Brent pricing, used by other companies, is “rather a matter of habit.”

Dubai is a medium-sulphur crude that is close in performance to Urals, while Brent is a light, sweet crude. “In addition to different quality, the regional structure of supply and demand will affect the relative price levels of benchmarks (discounts/premiums). The fact is that demand in Europe and the United States is now only indirectly relevant for Russian oil,” says Boris Sinitsyn, head of resource sector analytics at Renaissance Capital. “In addition, it is known that the basket of North Sea oil is also changing due to the addition of American WTI . This factor, which could, for example, include the release or accumulation of strategic reserves, will directly affect the Brent price starting from 2023.”

Now the values ​​of Brent and Dubai are comparable, but last year there was a rather significant difference between them. According to Argus, the average forward price for Dubai for next month delivery since the beginning of 2023 was $0.99 per barrel below the North Sea dated Brent quotes, and the average difference for 2022 was $4.84 per barrel. Thus, if Dubai’s discount to Brent continues, this could allow oil companies to save some on taxes.

Now the issue of revenues from the oil industry is extremely painful for the Russian budget, since the volume of oil and gas revenues lags behind the plan. Under these conditions, the Ministry of Finance is trying to raise taxes: since July, the maximum discount for Urals to Brent for tax purposes was $25 per barrel, but the Ministry of Finance wants to reduce it to $20 from September. However, these amendments to the Tax Code have not yet been submitted to the State Duma.

Dmitry Kozlov